Index Funds vs Stocks | Stock Market For Beginners
Published: 2023-04-17
Status:
Available
|
Analyzed
Published: 2023-04-17
Status:
Available
|
Analyzed
Predictions from this Video
Incorrect: 0
Prediction
Topic
Status
In bull markets, index funds tend to outperform stock picking. In bear markets or crashes, stock picking or active management tends to outperform index funds.
"generally speaking when the stock market is going up when you're in a bull market an index fund will outperform stock picking when the stock market is going down when you have a bear Market or a crash stock picking or active Management's outperforms index funds"
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Historically, the stock market has gone up in 80% of years over the last 50 years, with bull markets averaging 3 years and bear markets averaging 10 months.
"the stock market goes up more than it goes down so in the past 50 years the stock market has gone up in 40 of those 50 years the average duration of a bull market is three years the average duration of a bear Market is 10 months"
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Index fund investing is generally better for most people in most situations, but it's not a one-size-fits-all solution.
"so you can deduce that Index Fund investing is better if that's what you're thinking that in most situations and for most people I would say that I agree with you and I would say that you're absolutely right however this is not one size fits all"
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Index fund investing is not for everyone.
"is Index Fund Investing For Everyone then I would say no"
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The goal of active management (stock picking) is to outperform the market.
"the purpose is to beat the market"
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The goal of index fund investing is to match the market's performance.
"it is to match the performance of the market nothing more or nothing less"
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Warren Buffett advises that most investors are better off using index funds than picking stocks.
"most investors are better off using index funds instead of trying to pick stocks"
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In 2007, Warren Buffett bet a money management firm that an S&P 500 index fund would outperform five hedge funds over 10 years.
"in 2007 Warren Buffett was so confident about this that he made a wager Buffett Betts a New York City money management firm that over the next 10 years an S P 500 Index Fund would do better than five hedge funds"
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The S&P 500 index fund outperformed the five hedge funds in Warren Buffett's 10-year wager, yielding 12.5% annually compared to the hedge funds' 3.6%.
"after the 10 years the five funds had an average return of 36 over those 10 years so that's about a 3.6 return annually Buffett went with the Vanguard index fund tracking the S P 500 it went up 125 percent that's 12 and a half percent a year"
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Warren Buffett recommends that both small and large investors should use low-cost index funds.
"small and large investors should stick with low-cost index funds"
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The S&P 500 Index has historically averaged annual gains of 10.4% over 50 years, 9.7% over 30 years, and 10.3% over 20 years, with reinvested dividends.
"over the past 50 years the S P 500 Index has averaged an annual gain of 10.4 percent so this assumes that dividends were reinvested over the past 30 years it's average and annual gain of 9.7 percent over the past 20 years it's averaged an annual gain of 10.3 percent"
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After five years, 84% of actively managed funds underperform their benchmarks.
"after five years 84 percent of actively managed funds have underperformed their benchmarks"
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Over a 10-year period, 90% of active managers underperform their benchmarks.
"when you look at the 10-year when you look at a 10-year time frame it's actually 90 percent of active managers underperforms it's actually worse"
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In 2022, a down market year, 49% of active managers successfully beat the market.
"in 2022 when the stock market was going down 49 of active managers beat the markets"
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A long-term approach and mentality are crucial for successful index fund investing.
"you need to have a long-term approach a long-term mentality"
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Without a long-term mentality, significant market downturns (e.g., -29% in 1974, -23% in 2002, -38% in 2008) can severely damage a portfolio.
"if you don't have a long-term mentality you could get hit by a very bad year and it could crush your portfolio so in 1974 the stock market went down 29 in 2002 it went down 23 in 2008 the market went down 38"
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Consistent contributions are essential for index fund investors.
"if you're going to be an index fund investor then you have to stay consistent with your contributions"
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Market crashes are the best times to invest more money into index funds, not times to stop contributing.
"if the stock market crashes in a given year that is actually the best time for you to deploy your money that is the worst time for you to not contribute"
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The core and satellite approach involves investing the majority of funds in index funds, with a smaller portion allocated to stock picking for potential winners.
"you use a strategy and it's called the core and satellite approach so this is when you invest the bulk of your money in index funds but you're still allocating some money to pick stocks that you think will be winners"
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The speaker uses ETFs and index funds to complement their individual stock picks.
"I will use ETFs I will use index funds to complement my stock picks"
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If a portfolio becomes too concentrated in one sector (e.g., tech), index funds can be used to add exposure to other sectors like real estate.
"let's just say that I pick a bunch of tech stocks right and I realize that hey my portfolio is really Tech heavy I need to add some real estate exposure to my portfolio then I can buy an index funds for REITs"
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